Wednesday 22 April 2009 08.41 EDT
First published on Wednesday 22 April 2009 08.41 EDT

The chancellor, Alistair Darling, today told the rich they faced a top tax rate of 50% as he sought to plug a record budget deficit and admitted the country would suffer this year as a result of the biggest contraction in its economy since the second world war.

Presenting his new budget to parliament, Darling said the 50p tax rate replaces the planned 45p new top rate announced in November's pre-budget report and will kick in April 2010, a year earlier than planned. The new rate will only apply to the few earning over £150,000 a year, who will also see tax relief on their pension contributions curbed.

Financial markets reacted badly to that figure. The FTSE 100 shed about 30 points during the speech to 3957 while the pound lost nearly a cent against the dollar to $1.452 and as much against the euro to €1.12.

Calling the global economic downturn the "worst in 60 years", a subdued Darling said the budget would build on "the strengths of the economy and its people and help speed recovery."

"We will invest and grow our way out of recession," he told the House of Commons as he predicted that the British economy would return to growth at the end of this year.

He said that the total measures taken by the Treasury, together with the interest rate cuts from the Bank of England, had protected half a million jobs.

"There are no quick fixes. There is no overnight solution," he said.

The new growth forecast is the worst in the post-war period and represents a massive turnaround in the economy's fortunes.

A year ago Darling forecast growth for this year of around 2.5% - in line with the economy's long-term average. By November's pre-budget report that had fallen to around -1% but now even that has turned out to be hopelessly optimistic and blew away a decade of boasting from Gordon Brown that he had abolished "Tory boom-bust".

Darling forecast that the economy would rapidly return to growth next year, growing by 1.25% and 3.5% in 2011, although that is a far more optimistic outlook than most City economists.

"We suspect that 3.5% is far too optimistic for growth in 2011 especially given the very substantial fiscal tightening that will be required," said Howard Archer, economist at IHS Global Insight.

"Clearly, if growth is significantly less than the chancellor forecasts, it will increase the risk that his public finance targets will be missed, thereby requiring additional tightening measures further out."

Earlier today the Office for National Statistics reported that net borrowing for the 2008/09 fiscal year which ended last month came in at a whopping £90bn, £12bn worse than the chancellor pencilled in as recently as the November pre-budget report and more than double last year's budget forecast for a shortfall of £43.

That deficit does not quite equal, in terms of the share of national income, the 7.7% suffered by the Tories in 1993/94 but this year's deficit will bust that record spectacularly.

The main cause of the rising deficit has been a collapse in tax receipts, particularly of VAT and corporation tax, as the economy and City have slumped. Spending, though, has continued to rise in line with Labour's plans, buoyed by growing expenditure on unemployment benefit as the jobless total has risen by over 600,000 in the past year.

The chancellor said his budget would represent a fiscal easing of 0.5% of national income this year but then a tightening of 0.8% of gross domestic product in each of the following years until 2013/14 as he seeks to bring the public finances back under control.

But he acknowledged that the years of deficits and the cost of rescuing many of Britain's banks would push the national debt up from 51% now to a peak of 79% in 2013/14 before it starts to drop back.

Darling announced a series of measures to try to help young people coming into the workforce either to find a job or to stay in some kind of education or training.

"We need a clear path to recovery here both fiscally and in investing to build Britain's future.